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Tax policy in a model of search with training

Author

Listed:
  • Jan Boone

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Ruud de Mooij

Abstract

This paper develops a model of search on the labour market with training. The model reveals how the tax system can restore the social optimum if the Hosios condition is not satisfied in the private equilibrium. Furthermore, the effects are explored of a second-best reform from a specific tax per job to a marginal wage tax, when a given amount of public revenue has to be raised. We find that (i) a marginal wage tax is less distortionary to raise revenue than is a specific tax per job, provided that training is not distorted initially; (ii) this conclusion may reverse in the presence of training distortions; (iii) marginal wage taxes are less distortionary in economies characterized by commitment in wage bargaining, such as the European labour market. Hence, tax reforms that reduce the tax burden per job and raise the marginal wage tax, such as an EITC or a negative income tax, are more attractive in Europe than in the US.

Suggested Citation

  • Jan Boone & Ruud de Mooij, 2000. "Tax policy in a model of search with training," CPB Research Memorandum 161, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:resmem:161
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J0 - Labor and Demographic Economics - - General

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